China’s Economic Growth Needs More Than Rate Cuts: Analysts Urge Fiscal Action
Introduction
As China’s economy shows signs of slowing, analysts argue that interest rate cuts alone are insufficient to stimulate growth. While recent measures from the People’s Bank of China (PBOC) have prompted short-term market optimism, experts emphasize the need for substantial fiscal policy support to address deeper economic challenges.
The Current Economic Landscape
China’s economy grew by 5% in the first half of the year, but concerns are mounting that it may fall short of the government’s full-year growth target of around 5%. Weak domestic demand and declining industrial activity are contributing to this uncertainty. Retail sales growth has stagnated, barely surpassing 2% year-on-year in recent months.
Recent Rate Cuts and Market Reactions
On Tuesday, the PBOC surprised markets by cutting various interest rates, including those on existing mortgages. This move resulted in a temporary surge in mainland Chinese stocks. Larry Hu, Chief China Economist at Macquarie, described it as potentially marking the end of China’s longest deflationary period since 1999. However, Hu cautions that genuine reflation is likely to require significant fiscal spending, particularly in the housing sector.
The Need for Fiscal Support
Analysts highlight a crucial shortfall in government spending, estimating a 1 trillion yuan deficit if Beijing is to meet its fiscal targets for the year. CF40, a prominent Chinese think tank, indicates that without a rebound in general budget revenue, authorities may need to increase the fiscal deficit and issue additional treasury bonds to fill the gap.
Edmund Goh, head of China fixed income at abrdn, emphasizes that without major fiscal policy support, the yields on Chinese government bonds are unlikely to rise significantly. He anticipates that Beijing will be compelled to ramp up fiscal stimulus, despite previous hesitations.
Diverging U.S. and Chinese Bond Yields
The gap between U.S. and Chinese government bond yields has widened significantly since April 2022, when U.S. yields surpassed Chinese ones for the first time in over a decade due to aggressive Fed rate hikes. As of now, the U.S. 10-year Treasury yield stands at 3.74%, compared to China’s 10-year yield, which recently hit a record low of around 2%. Analysts from Invesco maintain a neutral outlook on Chinese government bonds, expecting yields to remain low amid ongoing economic uncertainties.
The Role of Monetary Policy
While the PBOC’s recent cuts aim to ease financial pressures, they alone cannot stimulate growth without accompanying fiscal measures. Analysts warn that high leverage among Chinese corporations and households makes them hesitant to increase borrowing, diminishing the effectiveness of loose monetary policy.
Looking Ahead: Potential for Fiscal Stimulus
As the Chinese government grapples with its fiscal strategy, experts are calling for a more proactive approach to stimulate the economy. Recent comments from PBOC Governor Pan Gongsheng highlight a cautious stance regarding bond issuance, which has been slower than needed. Despite this, there are indications that market sentiment may be shifting positively, with hopes for improved growth leading to a short-term stabilization of the 10-year Chinese treasury bond yield above 2%.
Conclusion
In summary, while recent interest rate cuts by the PBOC have provided some relief to markets, they are not a panacea for China’s economic challenges. A robust fiscal response is essential to bolster growth and address the significant shortfalls in government spending. Without these measures, analysts predict that China’s economic recovery may remain sluggish in the coming months.